The three most expensive mistakes a new business can make
I was a trial attorney for over a decade before pivoting to a legal practice dedicated to keeping clients out of the courtroom. Though we prevailed in nearly every case, my clients usually found the process unduly expensive, time consuming, emotionally depleting and wholly insufficient to get them back what they were owed. Simply put, by the time a business steps into a courtroom, they’ve usually already lost.
During this time, I noticed several patterns present in the costliest cases, many of which had simple fixes. The vast majority of cases I’ve litigated could have been avoided altogether or handled much more efficiently had the client done a few things differently.
Read on for the three most expensive mistakes a new business owner can make – and how to avoid them.
- Failing to document your agreement with your business partner
Let’s say you meet a new colleague, sparks fly, and you know that you must do business together. In your excitement, it’s tempting to rush forward toward the fun parts of forming a business and trust that you’re on the same page about the legalities of your partnership. I have litigated several partnership disputes in which the partners were good friends — or even family — and decided either not to prepare a written agreement or to do so without a lawyer. A decade after forming the businesses, the partners would often find themselves flush with revenue — and tension that grew with the profits.
Almost always, the partners had formed different ideas of what their rights and obligations were and sought to assert them once the company was profitable. A few times, one partner would try to take advantage of the lack of an agreement to negotiate more favorable terms. One such case involved a client who failed to negotiate or even discuss the terms with his partner, instead signing a document he didn’t understand, which ended up being the subject of litigation costing him more than $250,000 in legal fees.
Your partnership agreement (or operating agreement/bylaws) is quite possibly the most critical document you will ever sign. Use it to not only protect your rights, but also to make sure that you’re actually on the same page as your partner(s). Considering legal counsel from the outset can also save you a significant amount of money, time and headaches down the road.
- Failing to research people with whom you do business
I have represented a number of clients involved in legal disputes that were foreseeable (and preventable) had the client done its due diligence before partnering with a bad actor. I define the term bad actor loosely to mean people or companies that lack integrity, honesty, professionalism or competence. These types of people will not only do harm to you or your business, but they will likely also do harm to other parties with whom you do business, exposing you to liability from third parties.
My advice prior to entering into an agreement to work with someone in any capacity (employee, independent contractor, partner or any other business associate upon whom you will rely): take your time, ask around, have multiple frank conversations with them in different settings, conduct Google and social media searches, and run their name through legal databases to determine if they’ve been a party to any previous lawsuits. I’ve had sophisticated clients find themselves victims of six-figure embezzlement, and the perpetrator in each case had numerous red flags that would have been revealed with minimal effort had they looked.
- Not investing in legal advice early enough
The majority of litigation in which my clients have been involved has dealt, in some respect, with the interpretation of a contract. You may believe that you understand the implications of the terms of a contract that you drafted; however, of all the contracts that I’ve reviewed as a transactional attorney that were drafted by non-lawyers, nine out of ten were riddled with ambiguity. As a result, the litigation process is drawn out and more expensive.
More often than not, litigation can be avoided, or at least narrowed in scope, if parties seek the advice of legal counsel on the front end — specifically to review or draft contracts.
You may think that you cannot afford to invest in legal advice out of the gate; the truth is that you may not be able to afford not to.
About the author
Heather Orr is an accomplished business law attorney who, after many years as a litigator, built a practice dedicated to keeping small businesses and startups out of the courtroom. She has served the entrepreneurial community through her firm, HSO Law, since 2009. Heather also served as an adjunct law professor at Loyola Law School for three years, where she taught a course on business planning, and is the author of How to Like Being a Lawyer.